Upload
corey-carter
View
217
Download
0
Tags:
Embed Size (px)
Citation preview
1
Task Force on Review of Public Finances
2
Introduction
• Alert sign for Hong Kong fiscal system
• Hong Kong fiscal system undergoing structural changes
• Trust that Members and the community understand the importance of prudent fiscal management to the long term prosperity and stability of Hong Kong
3
Alert sign for Hong Kong fiscal system
• Operating deficits and consolidated deficits will persist for each of the next five years if the current revenue and expenditure policies are to continue and the economy is assumed to grow at a steady (i.e. medium growth) rate. Position as follows:
4
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
Operating deficit($bn)=GDP
50
4.0%
46
3.7%
43
3.3%
47
3.5%
50
3.4%
55
3.6%
Consolidated deficit($bn)=GDP
66
5.2%
42
3.4%
55
4.3%
55
4.0%
54
3.7%
58
3.8%
Fiscal reserves(accumulative) ($bn)=GDP
369
29.3%
327
26.0%
272
21.0%
217
15.9%
163
11.2%
104
6.8%
=Months ofgovernmentexpenditure
18 15 12 9 7 4
Alert sign for Hong Kong fiscal system
5
Projected Fiscal Balance and Fiscal Reserves 2001-02 to 2006-07
Current Policies Scenario (Medium Growth)
-5.2
29.3
-3.8-3.7-4.0-4.3-3.4
26.0
21.0
15.9
11.2
6.8
-10
-5
0
5
10
15
20
25
30
35
2001-2002
2002-2003
2003-2004
2004-2005
2005-2006
2006-2007
% of GDP
Fiscal Balance Fiscal Reserve (Cumulative)
6
Alert sign for Hong Kong fiscal system
Projected operating and consolidated deficits to persist in the next 20 years
2001-02 2006-07 2011-12 2016-17 2021-22
Operating deficit($bn)=GDP
50
4.0%
55
3.6%
106
5.3%
192
7.6%
331
10.2%
Consolidated deficit($bn)=GDP
66
5.2%
58
3.8%
114
5.7%
209
8.2%
365
11.2%
Fiscal reserves(accumulated) ($bn)=GDP
369
29.3%
104
6.8%
(343)
(17.4%)
(1,178)
(46.5%)
(2,661)
(81.8%)
= months ofgovernmentexpenditure
18 4 (10) (23) (36)
Fiscal reserves projected to deplete in 2008-09
7
Projected Fiscal Balance and Fiscal Reserves 2001-02 to 2021-22
Current Policies Scenario (Medium Growth)
-5.7
-5.2 -3.8-8.2
-11.2
-81.8
-46.5
-17.4
29.3
6.8
-100
-80
-60
-40
-20
0
20
40
2001-2002
2006-2007
2011-2012
2016-2017
2021-2022
% of GDP
Fiscal Balance Fiscal Reserve (Cumulative)
8
Causes for the alert
• Changes in the economy
• Changes in government revenue
• Changes in government expenditure
9
Changes in the economy: 1991-1997
• Upsurge of the asset markets
• Average real GDP growth 5.2% per annum
• Inflation:– average GDP deflator 6.9% per annum– average CCPI 8.5% per annum
10
Changes in the economy: 1998-2001
• Asian financial crisis
• Global economic downturn
• Average real GDP growth 1.9% per annum
• Deflation:– average GDP deflator –3.0% per annum– average CCPI –1.6% per annum
11
Year-on-Year GDP Growth Rates in Real and Nominal Terms
5.1
6.3 6.15.4
3.94.5
5.0
-5.3
3.0
10.5
0.1
14.8
16.6
15.2
12.6
6.6
10.7 11.1
-4.9
-2.6
3.2
-0.3
-8
-6
-4
-2
0
2
4
6
8
10
12
14
16
18
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
%
Real Growth Nominal Growth
12
GDP Deflator and Composite CPI
9.29.7
8.5
6.9
2.5
5.9 5.8
0.4
-5.4
-6.5
-0.5
11.6
9.68.8 8.8 9.1
6.35.8
2.8
-4.0 -3.8
-1.6
-8
-6
-4
-2
0
2
4
6
8
10
12
14
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
%
GDP Deflator Composite CPI
13
Changes in government revenue (1)A fundamental change has occurred in the proper
ty market since 1998/99
Land Premium
8.9 8.9
18.5 19.1 19.427
63.6
19.3
34.829.5
8.6
0
10
20
30
40
50
60
70
1991-1992
1992-1993
1993-1994
1994-1995
1995-1996
1996-1997
1997-1998
1998-1999
1999-2000
2000-2001
2001-2002
($bn)
14
Changes in government revenue (1)
A fundamental change has occurred in the property market since 1998/99
Stamp Duty
6.9
9.5
12.8
9.57.6
15.117.3
6.34.9 4.9 4.5
02468
101214161820
1991-1992
1992-1993
1993-1994
1994-1995
1995-1996
1996-1997
1997-1998
1998-1999
1999-2000
2000-2001
2001-2002
$bn
15
Changes in government revenue (1)
A fundamental change has occurred in the property market since 1998/99
6.79.7
13.0 13.7 14.5 14.3 14.012.1
7.9
4.0
5.8
7.0 7.18.0 8.7 9.0
5.8
5.3
0
5
10
15
20
25
1991-1992
1992-1993
1993-1994
1994-1995
1995-1996
1996-1997
1997-1998
1998-1999
1999-2000
$bn Property Sector Banking Sector
16
Changes in government revenue (2)Since 1997-98, investment income from the fiscal re
serves became a key operating revenue item. Its importance has been increasing.
Investment Income
3.0 1.83.4
4.9 5.9 5.6
15.0
31.6
36.8
19.5
0.00
5
10
15
20
25
30
35
40
1991-1992
1992-1993
1993-1994
1994-1995
1995-1996
1996-1997
1997-1998
1998-1999
1999-2000
2000-2001
2001-2002
$bn
17
Changes in government revenue (2)Since 1997-98, investment income from the fiscal re
serves became a key operating revenue item. Its importance has been increasing.
0%
5%
10%
15%
20%
25%
1991-1992
1992-1993
1993-1994
1994-1995
1995-1996
1996-1997
1997-1998
1998-1999
1999-2000
2000-2001
2001-2002
Investment income as a % of operating revenueInvestment income as a % of operating expenditure
18
Changes in government revenue (2)
• To finance increasing annual operating expenditure by investment income at a constant proportion, annual investment income will have to increase accordingly.
• To achieve the above objective, there are theoretically two means –– rate of investment return will have to increase year after
year; but this is not quite possible with the global trend towards low inflation
– alternatively, there needs to be fiscal surplus year after year to increase the fiscal reserves and in turn the investment income
19
Changes in government revenue (2)
• However, with the recent consecutive years of deficits, the level of fiscal reserves has been falling. From $430 bn on 1 April 2001, the reserves are projected to decrease to $369 bn by the end of the current fiscal year.
20
Changes in government revenue (3)
• Outreach of the Hong Kong economy to the Mainland and elsewhere, plus acceleration of economic globalisation may conceivably adversely affect direct tax revenue, particularly profits tax and salaries tax
• This is due to the territorial source-based tax system practised in Hong Kong
• With available data, the magnitude of the effect cannot be quantified at this stage
21
Changes in government expenditure (1)
• Higher differential price movements in government expenditure than that of the economy; government prices slower to adjust
• Partly due to the heavy weighting of the salaries and personnel-related component (eg pension) in government operating expenditure
• The effect will worsen in a deflationary environment because government wages have not adjusted downwards in line with prices in the economy in general
22
Changes in the GCE Deflator andGDP Deflator
10.410.0
10.9 10.9
9.2
6.5 6.4
2.7
-0.2
-1.7
2.1
9.29.7
8.5
6.9
2.5
5.9 5.8
0.4
-5.4
-6.6
-0.5
-8
-6
-4
-2
0
2
4
6
8
10
12
1991-1992
1992-1993
1993-1994
1994-1995
1995-1996
1996-1997
1997-1998
1998-1999
1999-2000
2000-2001
2001-2002
%
GCE Deflator GDP Deflator
23
Changes in government expenditure
(2) Ageing population, dependency ratio to increase sub
stantially in 2010s270
125
143155 157 158
185
227
0
50
100
150
200
250
300
1990 1995 2000 2005 2010 2015 2020 2025
per
'000
per
sons
age
d 15
-64
Actual Projected
24
Changes in government expenditure (3)
• Since 1998, Government has maintained growth of expenditure higher than growth of the economy in order not to exacerbate the economic downturn
• As a result, growth in government expenditure has far exceeded growth of the economy in money (or nominal) terms – one of the reasons for the strain on the fiscal system
25
Cumulative Growth Rate in Government Expenditure, Government Revenue and GD
P in Nominal Terms
0
50
100
150
200
250
300
350
400
450
500
1986-
1987
1987-
1988
1988-
1989
1989-
1990
1990-
1991
1991-
1992
1992-
1993
1993-
1994
1994-
1995
1995-
1996
1996-
1997
1997-
1998
1998-
1999
1999-
2000
2000-
2001
2001-
2002
%
Nominal Growth in Government Expenditure Nominal Growth in Government Revenue
Nominal Growth in GDP
26
Government Revenue, Government Expenditure and Public Sector
Expenditure as a Percentage of GDP
17.2 17.4
18.6
17.4
19.0
13.8
14.5
16.4 16.2
17.0
15.314.7
18.1
21.7
13.8
17.7
21.2
17.117.5
16.7
19.0
18.319.0
21.1
22.0
21.2
17.7
17.7
15.8
17.8
16.4
17.3
16.2
10
12
14
16
18
20
22
24
1991-1992
1992-1993
1993-1994
1994-1995
1995-1996
1996-1997
1997-1998
1998-1999
1999-2000
2000-2001
2001-2002
% of GDP
Total Government Revenue Total Government Expenditure
Total Public Expenditure
27
Budget Model
• Economic parameters
• Demographic parameters
• Revenue and expenditure parameters
28
Budget Model Economic parameters
Calender Year 2002 2003 - 2006 2007-2021
% % %
Real GDP Growth Rate 1.0 3.5 3.0
GDP Deflator -1.5 0.9 2.0
Nominal GDP Growth Rate -0.5 4.4 5.1
29
Budget Model Revenue and expenditure parameters
• Revenue– each major revenue item aligned with an economi
c driver– eg. In the longer term,
• profit tax yield = 9.3% of gross operating surplus of previous year
• salaries tax yield = 5.0% of compensation of employees of previous year
30
Budget Model Revenue and expenditure parameters
• Expenditure– current expenditure control guideline, growt
h of government expenditure aligned to trend real growth of economy
– addition of 80 basis points on top of GDP deflator to reflect government expenditure price rigidity
– social consequences of ageing population
31
Budget Model Projections• To achieve consolidated balance in five years' time, revenue increase and/or
expenditure cut measures averaging $35 billion per annum, about 12.3% of annual government expenditure, will be required from 2002-03 to 2006-07 under medium growth assumptions
• Beyond 2006-07, revenue increase and/or expenditure cut measures will need to increase to:
$89 billion in 2011-12, being 21.9% of government expenditure*
$141 billion in 2016-17, being 26.0% of government expenditure*
$215 billion in 2021-22, being 29.7% of government expenditure*
* Revenue increase and/or expenditure cut has already taken into account amount of measure in previous period.
32
Budget Model Projections•Assuming that the level of fiscal reserves should be maintained at 18 months of government expenditure starting in 2016-17 and thereafter, the revenue increase and/or expenditure cut measures will be:
$127 billion in 2011-12, being 31.3% of government expenditure*
$186 billion in 2016-17, being 34.3% of government expenditure*
$236 billion in 2021-22, being 32.6% of government expenditure*
* Revenue increase and/or expenditure cut has already taken into account amount of measure in previous period.
33
Budget Model Projections
• Assuming that the level of fiscal reserves should be maintained at 12 months of government expenditure 2007-08 and thereafter, the revenue increase and/or expenditure cut measures will be:
$107 billion in 2011-12, being 26.4% of government expenditure*
$159 billion in 2016-17, being 29.3% of government expenditure*
$235 billion in 2021-22, being 32.4% of government expenditure*
* Revenue increase and/or expenditure cut has already taken into account amount of measure in previous period.
34
Annual Revenue and/or Expenditure Measures Required under Different Scenarios
(Medium Growth)
* Revenue increase and/or expenditure cut has already taken into account amount of measure in previous period.
35
76
118
183
35
110
161
203
35
93
137
202
0
50
100
150
200
250
2002-03 to2006-07*
2007-08 to2011-12*
2012-13 to2016-17*
2017-18 to2021-22*
$bn
Consolidated Balance Scenario
18-Month Fiscal Reserves Scenario
12-Month Fiscal Reserves Scenario
35
Fiscal Reserves Levelsunder Different Scenarios
(Medium Growth)
* Revenue increase and/or expenditure cut has already taken into account amount of measure in previous period.
309 309 309 309309
508
813
1,088
309406
542
725
0
200
400
600
800
1,000
1,200
2002-03 to2006-07*
2007-08 to2011-12*
2012-13 to2016-17*
2017-18 to2021-22*
$bn
Consolidated Balance Scenario
18-Month Fiscal Reserves Scenario
12-Month Fiscal Reserves Scenario
36
Conclusion
• Change fiscal “lifestyle”
• Expenditure: reinforce existing guideline by having regard to trend GDP growth in money (or nominal) terms in addition to GDP growth in real terms
• Revenue: consider views of Advisory Committee on New Broad-based Taxes and others